Enquiry:

With regard to pharmaceutical manufacturing companies, your clarification is required about the accounting of promotional/ marketing items that are left undistributed at year end e.g., fridge, air-conditioner, watches, drafting pads etc. Some pharmaceutical companies are classifying these items as their current assets under stores and spares heading. Is this treatment correct? Or should these undistributed items be expensed out as well in the year of purchase, being non asset?

It is important to note that there are no written terms and conditions. These items are distributed as gifts to doctors under implied consideration that they will refer the medicine of pharmaceutical company to their patients.

 

Opinion:

The Board would like to highlight that the enquired matter has been deliberated by the International Financial Reporting Interpretations Committee (IFRIC) in its meetings and the IFRIC decision based on IAS 38 ‘Intangible Assets’ is as under:

“Paragraph 5 of IAS 38 states that IAS 38 applies to expenditure on advertising activities. Accordingly, the Committee concluded that if an entity acquires goods solely to be used to undertake advertising or promotional activities, it applies the requirements in paragraph 69 of IAS 38. Paragraph 69 requires an entity to recognise expenditure on such goods as an expense when the entity has a right to access those goods. Paragraph 69A of IAS 38 states that an entity has a right to access goods when it owns them. The entity, therefore, recognises expenditure on those goods as an expense when it owns the goods, or otherwise has a right to access them regardless of when it distributes the goods.”

In explaining the rationale for the requirements in paragraph 69, paragraph BC46B of IAS 38 states that goods acquired to be used to undertake advertising and promotional activities have no other purpose than to undertake those activities. In other words, the only benefit of those goods for the entity is to develop or create brands or customer relationships, which in turn generate revenues. However, applying IAS 38, the entity does not recognise internally generated brands or customer relationships as assets.

IFRIC decision on the enquiry can be accessed in the IFRIC update at:

http://www.ifrs.org/news-and-events/updates/ifric-updates/september-2017/#8

In view of the IFRIC decision, the Board has accordingly concluded that in the enquired scenario the promotional and marketing goods (refrigerators, air conditioners etc.) should be recognised as an expense in the statement of profit of loss, in accordance with IAS 38. The expense should be recorded when the pharmaceutical company has right to access to those goods, regardless of when those promotional and marketing goods are distributed to the doctors.

(April 20, 2018)